How Do I Complete My Crypto Tax Accounting, So I Can Get My Taxes Done?
Many people might believe that the decentralized nature of cryptocurrencies places them outside of taxation. As much as we wish that were true, it is not. With tax laws covering cryptocurrencies, there is a need for crypto tax accounting.
The Internal Revenue Service (IRS) does not recognize cryptos as actual currencies. Nevertheless, there is a provision to ensure full compliance with tax laws. We will take you through all you need to know about accounting for cryptocurrency, including the accounting software.
Should You Pay Tax on Crypto?
Tax laws cover all crypto transactions through regulated channels. That means getting your crypto accounting right for taxation. Let’s explain why you should consider this a priority.
The IRS does not consider cryptocurrency as actual currencies but classifies them as property. As a result, people must report their crypto capital gains and losses for their crypto tax accounting. Any gains or losses you incur from dealing with cryptocurrencies will determine your taxes.
Tax reporting is necessary if you do the following:
- Invest in the buying and selling of cryptos
- Mine Cryptocurrency
- Receive payment through Bitcoin and altcoins
- Exchange from crypto to fiat currency
There are many other transactions where crypto tax accounting is compulsory. Nevertheless, it is equally important to understand how to calculate it.
Crypto Tax Software
Software or tax software will be adequate for a streamlined cryptocurrency transaction. Once you have multiple income streams and large amounts, you are better off with an accountant or tax accountant.
As we mentioned earlier, cryptos fall under property when it comes to taxation. As capital assets, you can report long-term and short-term gains or losses.
The typical rates for the categories are as follows:
Short-term gains or losses: These involve transactions within a year. The usual rate can fall between 10% and 37%.
Long-term gains or losses: They involve transactions that exceed a year. The typical rate can be 0%, 15%, or 20%.
This is where things get tricky. It is also where cryptocurrency accounting software becomes helpful. All calculations on gains or losses begin with the cost of the property, in this case, your cryptocurrencies.
Once you get that out of the way, you can adjust it to include the fees or commissions you paid during the initial transactions. Then, you must determine the sale amount and remove any fees or commissions paid on closing.
The final step is determining the difference between your adjusted sale and the adjusted cost. That gives either a capital gain or a capital loss.
11 ‘Quick And Easy Ways’ To Get Your Crypto Accounting Done Now
We’ve determined the legality of taxing cryptocurrencies. You have also seen how you can calculate your taxes. The following tips will give you solid footing in dealing with crypto tax accounting:
Determine Your Total Gain or Loss
Determining your total gain or loss is the first step in getting your crypto accounting done. While at it, you can use any of these identification valuation methods:
- First in, first out (FIFO)
- Last in, first out (LIFO)
- Highest in, first out (HIFO)
Track Your Transactions
You can use specialized software to track your transactions. You must get everything right, from the amounts to the addresses. Keep invoices, receipts, and, if possible, screenshots.
Separate Trades from Holdings
The IRS classifies cryptocurrency trades differently from holdings. Both are taxable, but under different models. Hence, sort them out as quickly as possible.
Maintain One Wallet
Using a single wallet allows you to track your transactions easily. Remember that taxation is all about records; the better you are at it, the easier the process.
Maintain a Ledger for Your Operations
Each ledger should contain the date, recipient, income, expense, value at the time of the transaction, and other relevant details.
Prepare and Update Your Reporting Forms
Different tax revenues worldwide will use various forms. In the U.S., they include Form 8949, Schedule D, and Form 1040. Update them regularly.
Check For Refunds
Sometimes, you may need a refund. After filling out the forms, double-check them for any extra balances.
Confirm The Details
It never hurts to run through the forms again. This time, look for any discrepancies and errors.
Send The Forms To The Appropriate Tax Authority
Either e-file or send in paper returns by mail. Once completed, you should send your tax returns to the IRS. Always file your taxes on time (or at least by the final day of your extension) to avoid interest and penalties.
Keep A Copy for Yourself
Make sure you have extra copies of all the forms you send out. These copies are crucial to disputing any IRS claims.
Hire A Crypto Tax Accountant
Crypto tax accounting can quickly become overwhelming, especially for large and frequent transactions. The best thing to do is to hire a professional to do the work. A Crypto CPA or virtual currency tax accountant can make your life and this process a breeze.
A Crypto accountant can save you more in taxes than their fee may be. Just the time saved on long evenings and weekends in frustration can make it worth it.
Knowing your tax return and crypto accounting is done correctly (and you don’t have to worry about audits or tax mistakes), can have a deep psychological and emotional benefit. These mental health benefits can positively impact all aspects of your life including improved productivity, lower your stress and anxiety and help you earn more money!
Cryptocurrencies are not treated like fiat currencies. Instead, the IRS sees them as property. That means crypto tax accounting is similar to that of a property.
Crypto accounting software can help manage the record-keeping and determine how much tax you should pay.
Stephan Knight is a nationally recognized, veteran Crypto Tax Accountant with 20+ years of experience in accounting. He currently works at Results Tax Accountants, a firm specializing in helping individuals and businesses with their Cryptocurrency tax and accounting needs. He’s also a co-author of a FREE Crypto tax and accounting blog at www.ResultsTaxAccountants.com/blog
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